Break-Even

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Business Studies Break-Even

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Presentation Transcript

Break Even:

Break Even

Lesson Objectives:

Lesson Objectives Understand the meaning of break even. Ability to calculate break even point using the contribution method.

Key terms from last lesson: :

Key terms from last lesson: Total Variable costs = variable costs x output level. Total costs = Fixed costs + variable costs. Total revenue = price per unit x sales.

What is break even?:

What is break even? It is the point at which the business makes just enough revenue to cover their costs. In other words profit = 0 Businesses must make a profit to survive. To make a profit, revenue must be higher than costs. “A business breaks even if it doesn’t make a profit or a loss”

Calculating the break even point:

Calculating the break even point There are two ways to calculate the break even point. The two ways are as follows: - The CONTRIBUTION METHOD. - PRODUCING A BREAK EVEN CHART.

The Contribution Method:

The Contribution Method This involves a two part calculation: Selling Price per unit – variable cost per unit = contribution (towards fixed costs). AND Fixed costs divided by contribution = Break even point.

Contribution Method - Example:

Contribution Method - Example If fixed costs = £2000, variable costs = £8 per unit, Selling price per unit =£10. Then break even would be: Price per unit – variable cost per unit = contribution (towards fixed costs). £10- £8= £2 (Contribution towards fixed costs) Fixed costs divided by contribution = Break even point. £2000 divided by 2 = 1000 1000 products will need to be sold in order order to break even and cover all their costs.

Task – Using the information from the previous slide answer the following questions.:

Task – Using the information from the previous slide answer the following questions. Would the business be in a profit or loss situation if they sold 1001 units? What would the business in a profit or loss situation if they sold 999 units? How much profit will the business make if they sell 1001 units?

Task – Calculate the following the break even points using the contribution method:

Task – Calculate the following the break even points using the contribution method [1] Fixed costs £4000 Selling Price £400 Variable Cost £200 [2] A business has the following costs: Rent £200 per month Rates £30 per month Salaries £450 per month Selling price £9 Raw materials £7

Task:

Task A business making t-shirts has the following costs: Fixed Costs £50,000 per year Variable Costs £3.70 per t-shirt Selling Price £12 each [a] Calculate the break-even point? [b] What would be the revenue as break-even?

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